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11/20/2005

Comment on Orphan Drugs and Intellectual Property-BECKER

I agree with most of Posner's discussion that as usual is presented very clearly. But I appear to differ on one issue that I believe is important.
The Orphan Drug Act of 1983 greatly expanded research on rare disease that has resulted in the discovery of many more drugs that successfully treat such diseases. Yet R&D spending on these drugs still takes only a small share of total spending on R&D by biotech and pharmaceutical companies. This is why I doubt, but cannot prove without much additional research, whether the R&D spending on orphan drugs stimulated by this Act significantly affected spending on finding treatments for more common diseases. It probably mainly increased total spending on medical R&D by a modest amount.
If this conclusion is correct, is it a mistake to have the Orphan Drug Act give greater intellectual property protection for drugs that treat rare diseases because these diseases would attract little research effort without better protection? I follow Posner initially and ignore the tax benefits and research subsidies provided by the Act. Suppose that only because of the better patent protection provided for seven years, a biotech company develops a drug that treats a rare disease with a small market, and charges a high price-as in some examples given in the Wall Street Journal articles. Assume to start the analysis that persons with the disease treated by this drug pay for treatments from their own resources, and enough of them can pay so that the biotech company can cover, perhaps more than cover, their development and production costs.
Surely not only the biotech company, but also persons with the disease are better off that the drug was developed due to the Act, even though they have to pay a lot. If they were not better off, they would not be willing to pay the high price demanded. Since it is a win-win situation, in such cases it is obviously helpful to persons with rare diseases to have an Act that stimulates the development of drugs that treat their diseases.
The analysis is not greatly different if private health insurance providers voluntarily cover rare diseases, as discovered with great effort by the woman with Gaucher disease chronicled by the Wall Street Journal. As Posner indicates, insurance companies might be willing to cover rare diseases since such coverage does not raise premiums very much for other persons who are insured. This would be a strictly business decision by the insurance industry if made without political pressure. So voluntary private insurance coverage of persons with rare diseases does not materially change my favorable evaluation of the Orphan Drug Act.
The hard cases arise when the high prices charged for drugs that treat rare diseases are paid not by persons with the diseases, but by the government through Medicaid, Medicare, or other publicly funded health programs. Then taxpayers rather than persons with these diseases or private insurance companies may foot most of the cost of developing drugs that treat rare diseases. Should taxpayers be asked to pay $100,000 per year (Posner's estimate of the average cost of the drugs developed for rare diseases) for drugs that can keep persons with rare diseases alive for many years? The answer is not obviously yes, although as Tomas Philipson has argued, government coverage might be justified if taxpayers are concerned about the welfare of persons who are unfortunate to have these diseases, or as a way to provide insurance protection against the risk of being born with rare genetic defects.
Medicare pays enormous sums to hospitals, nursing homes, and drug companies to keep elderly persons alive sometimes for only a few additional months. Yet the justification for doing this seems weaker than using government funds to pay for expensive drugs that enable young persons with rare diseases to live fairly normal lives for many years rather than dying at young ages. Perhaps Medicare should not pay a lot to keep elderly persons alive for a short period, but I do not believe the case for government payment of the cost of treating persons with rare diseases can be analyzed in isolation from a more general consideration of what type of health care should be provided out of government funds.
The Act also would look less favorable if, as is likely, biotech and other drug companies sometimes reclassify the markets for new drugs to help them qualify for the Act's benefits. I also have doubts about the wisdom of the provision that allows drug companies to immediately write off their R&D spending on orphan drugs.
So an overall evaluation of the Orphan Drug Act is not easy. Still, it might well be desirable to give stronger patent protection to drugs with small markets that treat rare diseases in order to induce the development of such drugs.

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